Loblaw, Metro profits fall as competition intensifies

Solarina Ho

5 Min Read

TORONTO (Reuters) - Two big Canadian grocers reported steep declines in quarterly profit on Wednesday in the face of escalating competition from the likes of Wal-Mart Stores Inc (WMT.N) and Target Corp (TGT.N), a new entrant to the Canadian market.

People walk by a Loblaw Companies Limited grocery store with a Joe Fresh clothing store inside, on the day of the annual general meeting of shareholders in Toronto, May 2, 2013. REUTERS/Mark Blinch

“The outlook is still very competitive. People are chasing sales at considerable expense. And we have to be careful between chasing those sales, spending too much money and not getting any returns,” Metro’s chief executive, Eric La Fleche, said.

Stock of both grocers fell as much as 6 percent. Shares of rival Empire Co Ltd (EMPa.TO), which operates Sobeys stores, also fell, shedding more than 2.5 percent.

Sobeys cemented its position as Loblaw’s closest rival earlier this year with a $5.7 billion deal for Safeway Inc’s SWY.N Canadian assets. Shortly after, Loblaw announced a C$12.4 billion ($11.82 billion) deal to buy Canada’s largest pharmacy chain, Shoppers Drug Mart SC.TO.

Shoppers reported slightly lower quarterly net income on Tuesday, due in part to charges from the pending acquisition.

COMPETITIVE PRESSURES

Loblaw said profit was hurt by a later Thanksgiving holiday and a decline in sales at its drugstores. Canadian Thanksgiving is in October, more than a month ahead of the bigger U.S. holiday, while pharmacies are feeling the squeeze from regulatory changes that cap generic drug prices.

It said start-up and other costs related to the spin-off of its real estate assets into a real estate investment trust, which was then taken public, Choice Properties (CHP_u.TO), and restructuring charges also dented profit.

“I’m disappointed ... we will not be able to deliver on the expectations we set last quarter,” said Loblaw Chief Financial Officer Sarah Davis. “The actual intensity we experienced in Q3 was greater than projected and caused actual performance to be below our expectations.”

The grocer, which also owns the Joe Fresh clothing brand, expects flat 2013 operating income. In July, it forecast income would grow in the mid-single digits percentage-wise.

It also said it was expecting marginal growth at established stores in the fourth quarter. In 2014, the company was forecasting the first half of the year to be more challenging than the second half.

In response to the competition, Metro plans to invest nearly C$250 million ($240 million) in Ontario in 2014.

“Overall, we view Metro’s results as disappointing ... and price investments will inevitably be required for Metro to defend its market position,” said BMO Capital Markets analyst Peter Sklar in a client note.

CRUNCHING THE NUMBERS

Loblaw net income fell to C$154 million ($147 million), or 55 Canadian cents per share, during the third quarter, from C$217 million, or 77 Canadian cents per share, in the same period last year.

Excluding certain one-time items, profit was 78 Canadian cents per share, falling short of analysts’ average estimates of 80 Canadian cents, according to Thomson Reuters I/B/E/S.

Total revenue rose nearly 2 percent to C$10.01 billion, just short of analysts’ average forecast of C$10.04 billion.

Sales at established stores, a key measure for retailers, climbed 0.4 percent.

Loblaw shares were down 6 percent at C$44.99 late morning.

Metro’s net earnings fell to C$83.6 million, or 88 Canadian cents a share, in its fiscal fourth quarter ended September 30 from C$145.1 million, or C$1.46 a share, a year earlier.

Adjusted profit was C$1.19, below analysts’ average estimate of C$1.22.

Sales fell nearly 9 percent to C$2.61 billion in the quarter, which had 12 weeks compared with 13 weeks the previous year, and same store sales were down 1.8 percent.

Metro’s stock was down 5.3 percent at C$62.26, its lowest level since early February.

($1 = 1.0493 Canadian dollars)

(Deletes paragraph that quoted analyst Peter Sklar saying dividend increase traditionally took place in the fourth quarter after Sklar corrected his note on the issue)